Marketing corporate debtdirectly to retail investors, a well-established practice in theUnited States, is just getting started in the UK. The marketeffectively opened in 2010 when the London Stock Exchange launchedits Order book for Retail Bonds (ORB), a service via which retailbonds can be traded in denominations of 1,000 pounds. Afterraising only 230 million pounds in its initial year, the marketshowed dramatic growth in 2011 with total issuance of more than 1.2billion pounds. So far 2012 hasn't quite matched this pace; as ofthe end of August, the UK market had raised 635 million pounds,bringing total issuance since the market opened to over 2 billionpounds.

“This year has begun a little slower than expected,” says TobyCroasdell, director of the medium-term note syndicate at Barclaysin London. “Especially as yields have compressed, a number ofpotential borrowers have been sidelined. But in the last fewmonths, we have started to see the increase in breadth of issuerswhich the investor community has been keen for. This has been ledby new names, many of whom have been mid-cap companies rather thanthe big FTSE 100 names.”

To date, the largest transaction in the UK was National Grid'sissue in September 2011. “For us, the key thing really was one ofinvestor diversification,” says Malcolm Cooper, the company'sglobal tax and treasury director, pictured at right. “Our interestwas particularly in index-linked debt—with over 5 billion poundsoutstanding already, we are one of the largest issuers ofindex-linked debt in the UK, which means that there is limitedinstitutional investor demand for further index-linked issuancefrom us. Retail investors gave us an additional opportunity.”

At the time of the issuance, inflation was running relativelyhigh, Cooper points out, while the returns that retail investorscould earn on other investments were relatively low. “We thoughtthat if we offered a retail [retail price index] bond, that wouldgive investors an opportunity to preserve their capital againstinflation, and actually earn a positive real return,” he adds.

While Cooper was expecting the size of thedeal to fall within the 50-million to 100-million-pound rangetypical of the market, demand greatly exceeded his expectations.The original issuance raised 260 million pounds and was followed bytwo further taps that brought the size of the deal to 282.5 millionpounds.

Croasdell says that in addition to diversification of fundingsources, issuers are attracted by the name recognition or PRbenefits that retail bond issuance can provide. “As with equities,investing in a company gives investors a certain buy-in to thecompany and the brand,” he says. “If you own a bond from a company,there's a much higher chance that you will buy their products orservices.” Aside from the National Grid deal, other notable issuersinclude ICAP, which saw its 50-million pound retail bond close aweek early in July, and Tesco Bank, which has issued three retailbonds to date, the latest of which was a 200-million pound,8.5-year bond launched in May.

Documentation is generally seen to be the biggest hurdle for UKissuers that are not traded on exchanges, particularly in thecurrent regulatory environment, although the process is becomingsmoother as the market becomes more established. Cooper notes thatraising funds in the retail market is much more labor-intensivethan in the institutional market: “A lot more effort goes into it,and the process takes far longer,” he says. “If you do aninstitutional offering, you can go from decision to pricing in aday and receive the funds within a week. The retail timeframe is alot longer than that.”

Of course, the retail bond market in U.K. is still dwarfed bythat in the U.S. If lightly structured notes are included,issuance in the U.S. totaled $10.3 billion in 2011 and is on trackto exceed $12 billion this year. “The market has done remarkablywell,” says John Radtke, CEO of securities and investment bankingfirm Incapital. “While theequity market is still struggling with the austerity issues inEurope and a slow recovery in the US, investors continue to favorretail corporate bonds and short-term bank CDs.”

The UK's retail bond market may be young, but it is alreadygiving companies access to an additional investor base. Appetitefor the securities is strong and the ICAP issue is only one ofseveral recent transactions that have closed early. If volumes inthe U.S. market are anything to go by, there is significantpotential for growth in the years ahead.